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Embraer's Defense Deal

Investors shouldn't expect a ton of major military deals for Embraer.

Embraer(NYSE:ERJ) is best known for its commercial aircraft. While Boeing(NYSE:BA) and Airbus duke it out in the jumbo jet segment, this Brazilian outfit concentrates on smaller planes. The strategy has worked reasonably well, winning Embraer JetBlue(NASDAQ:JBLU) as a customer, among others.

Today, though, marked a special occasion for Embraer's unheralded defense division: The company announced a major sale of its Super Tocano multipurpose turboprop fighter aircraft. In the $235 million agreement, Embraer will supply 25 of the planes to the government of Colombia to use for internal security and border patrol.

The deal is doubtless a positive for the company, but it also plunges Embraer deep into the field of international politics. Getting entangled in this web has its costs. As a result, investors hoping that the deal presages many more defense contracts to come probably shouldn't hold their collective breath.

The sale of the Super Tocanos to Colombia has been in the works for several years now, and the delay is probably not accidental. As it turns out, Colombia is a major U.S. aid recipient, having received $6 billion over the past five years as part of a program to stem the supply of cocaine reaching American shores. The aid gives the U.S. some leverage over Colombia's arms purchases, to put it mildly. This fact became clear after the Super Tocano plan was aired. Reports surfaced that the U.S. was trying to dissuade Colombia from the purchase and instead allocate funds to modernize Colombia's fleet of C-130 transport planes made by Lockheed Martin(NYSE:LMT).

Another potential Super Tocano deal with Venezuela may run into even stiffer resistance. President Hugo Chavez, no fan of the U.S., would like to buy between 12 and 20 of the aircraft for between $110 million and $180 million as part of an arms buildup that includes plans to buy advanced jets from Russia. Not surprisingly, the U.S. has taken a dim view of this Super Tocano agreement over fears that Venezuela's purchases could destabilize the region.

Embraer's Super Tocano sale is certainly the feather in the company's cap. But intense pressure from the U.S. could very well dampen sales in the future.